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Dollar cost average back in?
Old 07-19-2012, 12:29 AM   #1
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Dollar cost average back in?

We just completed a rollover of DH retirement plan to vanguard of a substantial amount, representing about 1/3 of our retirement portfolio. placed it all in prime money market

We know what we want to invest in, but should we dollar cost in- given the market right now?
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Old 07-19-2012, 06:13 AM   #2
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IMO, there is no clearly right answer. Many would just jump in at once and many studies suggest that is a good approach. If your DH's retirement plan was previously in the market it is just a continuation of that investment in the market, but just in a different fund.

If you think the market is currently over valued you could value average in. Value averaging is a bit different from DCA in that the amounts you invest are not constant, but vary some depending on whether the market is relatively undervalued or overvalued.

Let's say you had $100,000 to invest and you wanted to invest it over 10 months. At the beginning of the first month you would invest $10,000. At the beginning of the second month you would invest $20,000 less you balance at the end of the first month. So if the market rallied in the first month and the balance was $10,500, you would only invest $9,500 at the beginning of the second month. Conversely, if the market declined in the first month and you balance was $9,400, you would invest $10,600 at the beginning of the second month.

You continue this process until the $100,000 is fully invested. The approach helps you buy more when the market is relatively low and buy less when the market is relatively high.
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Old 07-19-2012, 06:50 AM   #3
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1/3 is a pretty big chunk. The fixed income allocations could be made now, but the equity investments could be spread over the next year. As pb4uski suggests, or by quarters.
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Old 07-19-2012, 08:14 AM   #4
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I think when you look at it from an asset allocation perspective, you might get the answer you want. Where it stands now, about 1/3 of your portfolio is sitting on the prime money market.

If you were to rebalance all at once, would the amounts you'd put into each asset class be too much? If not too much, then the all at once approach seems the way to go -- makes the process faster and easier.

If looking at rebalancing all at once leaves you with too much to invest at one time, then you can decide on when you which to have your portfolio rebalanced (for example, end of 2012? or end of 2013?) and then DCA appropriately.

Vanguard allows to set up automatic exchanges from one fund to another, so if you DCA monthly, you can exchange amounts monthly (or another frequency) until you reach the proper allocations. Looking back at when I FIRE'd, I was in a similar situation and took this approach (I had retired in Jan and planned being rebalanced by year's end).
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Old 07-19-2012, 10:28 AM   #5
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Originally Posted by bizlady View Post
We just completed a rollover of DH retirement plan to vanguard of a substantial amount, representing about 1/3 of our retirement portfolio. placed it all in prime money market

We know what we want to invest in, but should we dollar cost in- given the market right now?

Yes, I would.
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Old 07-19-2012, 01:51 PM   #6
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It was invested not long ago, it should be invested now.

One thing you could do is invest when it looks like market prices are lower than when you sold your previous investments. That way you come out a little ahead of where you were, regardless of what happens in the future. Easy to do if you are replacing investments with the same thing, tougher to do if there's not an easy match between old and new. That's my baseline action for something like this.
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Old 07-19-2012, 02:23 PM   #7
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One thing you could do is invest when it looks like market prices are lower than when you sold your previous investments. That way you come out a little ahead of where you were, regardless of what happens in the future. Easy to do if you are replacing investments with the same thing, tougher to do if there's not an easy match between old and new. That's my baseline action for something like this.
Unless it never gets lower than when you sold.
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Old 07-19-2012, 02:55 PM   #8
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Unless it never gets lower than when you sold.

It happens, especially looking for a drop, but really, what are the chances?
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Old 07-19-2012, 03:05 PM   #9
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Slim, but if it happens, by the time you finally give up you could have lost out on a lot of gains. Seems like a big gamble and probably not much of a gain for it at this point. If there was a 10% run-up while you were out of the market, I could see waiting for a month to see if there is a correction, but then I'd have trouble sleeping, worrying about missing out on a longer rally.

IMO the OP should just buy back in at whatever levels to get their AA back in sync. Otherwise you are essentially market timing, but because it seems like you sold for reasons other than market timing, it's even more of a gamble.

You can search for DCA or "dollar cost averaging" to see both sides of coin, plus value cost averaging and a few other suggestions like waiting for the low.
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Old 07-19-2012, 03:05 PM   #10
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This is a great question. I read William Berstein's new e-book last weekend, and he has some interesting things to say on the subject. At the risk of butchering a fairly complex analysis, the short version is that lump-sum investing is superior to DCA if you are dealing with a pot of money instead of a continuous stream. This is basically a market-timing argument. If you are investing a lump sum over a fixed period (say 30 or 40 years) the entry point and the sequence of returns become less important. With lump-sum investing, you are investing more dollars for more years. To quote Bernstein, "In a world with a high equity risk premium, then, lump-sum investing is usually the best choice."

He also cites a an analysis that argues that a DCA strategy longer than one year will under-perform a simple lump sum.

However, bizlady's situation is probably neither pure lump-sum investing or DCA. If she and her DH are still adding to the portfolio, that muddies the analysis. Similarly, if she and her DH plan to start withdrawals from the portfolio in the next few years (or right now), that also complicates matters. When investing a steady stream of savings, the sequence of the returns most definitely matters. In English, buying low and selling high beats the converse every day and twice on Sunday.

So, what to do? FWIW, first, I'd read Bernstein's little e-book. At $4.50, you can't go wrong. Then, I'd probably deploy all of the cash over a 3-6 month period in a manner that reflects your over-all asset allocation plan. Try to do it any longer than that, and the market-timing gremlins will get you. 2 years later, you'll still be sitting on a bunch of (inflation eroded) cash waiting for the right time to strike.
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Old 07-19-2012, 10:09 PM   #11
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We are retired now but will not start withdrawals until at least 59.5 years- 3.5 more years. Will give Vanguard a call and see what they think too, but consensus seems to be to DCA over at least 4 months. This is my gut feeling as well. Add to this it is an election year, and I may be overthinking it.
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Old 07-19-2012, 10:25 PM   #12
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Just curious - was it invested in the "market" before the rollover occurred?
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Old 07-19-2012, 10:43 PM   #13
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Yes, it was, 55 bonds and 45 stock. With Wells Fargo and only the the choices that were available within the plan. Rolled to money market prime in case market dropped in between, and because we were u decided how fast to reinvest. Just hit Vanguard yesterday.
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Old 07-20-2012, 07:49 AM   #14
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One benefit of DCA is to take human emotion out of the equation. It forces one to continue investing on a regular basis regardless of outside events. Otherwise, one might be tempted to wait and wait and wait for the perfect time or make a knee jerk decision out of fear or greed.
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Old 07-20-2012, 08:02 AM   #15
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He also cites a an analysis that argues that a DCA strategy longer than one year will under-perform a simple lump sum.
Not if you started your DCA in early 2000, which is what happened to me. Fortunately I had chosen at least 2 years to average in, which was against conventional wisdom at the time. The lump-sum investor in early 2000 really got hurt.

My point is that no matter what the studies or averages say, each period is different and you just really never know how it is going to turn out in the short term (a few years).
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Old 07-20-2012, 08:26 AM   #16
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My point is that no matter what the studies or averages say, each period is different and you just really never know how it is going to turn out in the short term (a few years).
And that's why a sound asset allocation strategy makes sense, and why you should get to and stay at your AA, unless you are a market timer.

I post this in every DCA thread and nobody ever tells me why this is wrong. If the right strategy is for you to DCA in such that you're 10% in now, 20% in next month, etc (at whatever rate you use), why wouldn't I, being fully invested right now, sell 90% so that I'm 10% in, then add 10% next month, etc.? Why is your money different from mine?
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Old 07-20-2012, 08:33 AM   #17
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I've tried the DCA, same as market timing IMHO. I just put it in and forget about it.
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Old 07-20-2012, 08:36 AM   #18
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If 55/45 bonds/stocks was right before the move, you should choose new investments that reflect your AA and achieve that now.

Other parts of the total portfolio work in concert with this, so it helps to view the entire picture.
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Old 07-20-2012, 09:25 AM   #19
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We are retired now but will not start withdrawals until at least 59.5 years- 3.5 more years. Will give Vanguard a call and see what they think too, but consensus seems to be to DCA over at least 4 months. This is my gut feeling as well. Add to this it is an election year, and I may be overthinking it.

Four months is a good time period to dollar cost average. I would use either four months, six months, eight months, or one year. Complex formulas on how much to dollar cost average are not needed, and one need not pay attention to all those surveys of what would have happened if one had dollar cost averaged in the past because circumstances are different in each time period. Yes, it's an election year, but also little has changed since the credit crisis, interest rates are insanely low, and we really don't know what will happen over here when the Euro goes down the drain over there.
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Old 07-20-2012, 10:26 AM   #20
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Yes, it was, 55 bonds and 45 stock. With Wells Fargo and only the the choices that were available within the plan. Rolled to money market prime in case market dropped in between, and because we were u decided how fast to reinvest. Just hit Vanguard yesterday.
If you just want to maintain what you had as far as allocation you might just roll it into wellesley ( VWINX ) at vanguard.
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